Editor’s note:Jason Best and Sherwood Neiss led the U.S. fight to legalize debt and equity based crowdfunding, co-authored Crowdfund Investing for Dummies and founded Crowdfund Capital Advisors where they provide strategy and technology services those seeking to benefit from crowdfund investing.

Hopes for startup crowfunding will have to wait for the federal bureaucracy to give it their stamp of approval: earlier this week the Securities and Exchange Commission (SEC) came out with a draft version of what they have in mind. Oddly enough, it doesn’t say much other than proceed with caution. Now the public has 30 days to comment before the SEC takes all those comments together to come out with the law. Coming out with a draft puts a hold on the ability of scrappy innovators to collect funding from their friends and family, further delays the ability of our nation’s entrepreneurs to innovate and create jobs and adds more confusion to laws that were meant to ease regulations. The result of this action will increase capital flows to securities attorneys and NOT entrepreneurs.

On April 5th Congress passed the JOBS Act, a bill that was designed to leverage the advances in technology to increase access to capital for entrepreneurs by easing regulatory and legal costs. It would allow entrepreneurs to raise capital through crowdfunding platforms instead of the expensive private placement route used today. In order to make crowdfunding effective existing “general solicitation rules” must be updated. (General solicitation is the act of a company publicly talking about raising money on places like the Internet – that’s illegal). The SEC has very strict rules about who can hear about a stock (aka security) offering and how they can hear about it. Today companies looking to raise capital through the sale of stock in their companies must either register the offering with the SEC (which costs a small fortune) or rely on an exception (aka exemption) from registration, the name of the exemption most companies use is called a Regulation D (Reg D) offering.

Most of the SEC’s exemptions from registration prohibit companies from engaging in general solicitation or general advertising. The goal of prohibiting solicitation is to protect naïve investors from snake oil salesmen. The reality is that we cannot use the ways most people communicate today (the Internet) to connect people who have money and are willing to invest with entrepreneurs who stand ready to build businesses and create jobs. Crazy, right?

This new change will allow stockbrokers to advertise stocks for sales to an important sector of the public in ways that have not been possible in 78 years. This change is called “lifting the ban on general solicitation”. In our opinion, this is a good thing, because lifting this ban will allow private companies to raise money from a larger pool of “accredited investors” now, and in the future (when crowdfunding is permitted), from the general public that is not accredited. (FYI, accredited investors make over $200,000/year in income or have over $1M in liquid net worth (meaning excluding the value of any real estate).

According to SEC data, the estimated amount of capital raised in Reg D offerings (the ones that used the exemption) in 2011 was just over $1 trillion. In an economic climate whereby capital is increasingly hard to come by, Reg D offerings play a critically important role in the financial markets. There are about 6,000,000 accredited investors in the USA and only 10% of them are active private investors.

Prior to the JOBS Act, reaching an accredited investor via a Reg D offering required a preexisting relationship making it hard to connect someone with money in Miami, FL or Park City, UT to an entrepreneur in Cleveland, OH. Now, the Internet can allow entrepreneurs to reach these investors via a broker/dealer and their social network. Moving the capital flow needle just a small percent can have a tremendous impact not only for capital formation but for cash strapped businesses and jobs.

When an investor wants to make an investment in a private company today, the investment banker that sells those share, is required to make sure that investor is accredited. They do this by having investors complete and sign a questionnaire that certifies that they have a level of wealth and understand the risks. This form of “self-certification” puts the burden on the investor to acknowledge the risk. It is the only way to have a scalable model. Seems simple right? “Are you accredited?” Yes or No? Can you imagine if people were forced to submit tax returns or W-2’s? No one would make investments in private companies…way too much big brother.

Rather than take the path the SEC’s been taking for years (self-certification) or providing a mechanism for investors to prove accreditation, the SEC, who was opposed to lifting the ban in the first place, came out with a proposed ruling that muddies the water even more.

Without telling companies how to certify an investor they came out with a ruling today saying that it is hard to tell companies what to do because the facts and circumstances of each stock offering vary so much. If they come out with one size fits all rule then it could be too onerous or too costly. A simple rule should have been, “Congress told us to remove the ban so we are and the way in which we’ve been allowing accredited investors to self-certify is the way in which we should move forward.” Rather than crafting ways in which the reduce fraud, the SEC has punted. This is not the way to create more jobs and innovation…except if want to do so for lawyers.